Changing dynamics in India’s startup eco-system

2014 was a defining year for the Indian startup ecosystem. Compared to the rest of the decade, a number of significant events and activities had changed the very nature of the startup world. Companies like Flipkart,Snapdeal, PayTm, Zomato, etc had redefined ‘scale’ and investors had started placing big bets on them. These companies darted ahead of the pack, to not just dominate their markets, but to grow it too. Of course, they were helped by a conducive environment – mobile phones, internet connectivity etc – but they also built infrastructure, people and processes that could handle a different order of scale than what they themselves could have imagined a few years ago. These startups demonstrated the potential and the competence to build world-scale companies and created new goalposts for entrepreneurs to aspire for.


As a result of e-commerce, a number of enabling technology and service companies started becoming more meaningful. Analytics, online engagement platforms, delivery companies etc found a much larger market to address their business case, and therefore their investment-worthiness became stronger. What remains to be seen is how effectively the e-commerce industry will retain customers once the discounting era is over and customers have to buy on the fundamental value proposition of e-commerce i.e. ease of access and choice. We may see some changed market dynamics at that stage, and the transition phase may throw up some new, unexpected leaders.

If you take the apparel and fashion sector, current leaders like Flipkart, Myntra, Jabong, etc appeal to the rational sense i.e. ‘this looks good, and is discounted, so buy.’ However, fashion is an emotional purchase category. Browsing and selecting garments, getting opinions from friends, etc. are aspects that make offline fashion-shopping pleasant. But in the online world, fashion sale is currently largely driven on the incentive of discounts. However, some emerging brands that are integrating and adopting social commerce, user experience (offline fashion events, private shows etc), and consumer understanding tools, technology-aided ‘product recommendation and discovery’ at the heart of their company strategy, may end up giving a tough fight to current leaders in the fashion segment as the discount era ends.

According to Ashish Jhalani, founder of eTailing India,

As much as 25 per cent of revenue for a leading eCommerce brand comes from Facebook. And it is growing. However, companies like Limeroad have based their entire business on social commerce, and they may become serious contenders in the market.

Anchal Jain, a global fashion industry veteran whose currently in-stealth-mode startup is launching a consumer preferences/understanding driven product recommendation tool for online fashion etailers, says,

Fashion marketing is a different science, and is layered with the art of presentation and easy discovery. Shopping becomes delightful when you let your senses do the product discovery.

Technology tools like the one Anchal is building will change the dynamics of the industry, and can again create a level playing field for existing e-commerce leaders, as well as new entrants to vie for dominance in the category.

Increased seriousness about India; among overseas investors:

The most important change for me was that overseas investors, who till recently were watching India as a possible market have now started having serious conversations in their board rooms about accelerating entry into India. Many of them are firming up plans for India, and have started serious efforts to explore their entry. Some of them have made significant announcements; and more will start investing or co-investing in the near future. My conversations with industry participants indicate that after the budget announcements, a number of investors will make their announcements for India.

However, institutional investors that are getting excited about what a handful of companies have been able to achieve are likely to expect a similar performance from the startups they shortlist for investment. And that might set the wrong expectations. If investors change their benchmarks on what kind of scale they would like to see in their investee companies, we may again get into a situation where loads of capital is committed to India, but eventually only very few deals get done because most startups do not have the revised scale of aspirations that investors now hope for.

Faster move to Series A funding (but only very few companies progressing to Series A)

Quite a few institutional investors are now open to making Series A investments slightly earlier than they are typically used to doing. They are now comfortable in making larger capital commitments even if the company has demonstrated the product-market fit, and has a reasonable level of team competence and commitment.

What that also means is that startups have to accelerate their progress to demonstrate that they have the foundation on which a scale business can be built. Investment Banker and Founder of Aurum Equity Partners LLP –  Sanjay Bansal  – adds,

It is imperative that startups think of exits. It is only when the exits happen and monies are made, that the enthusiasm to invest and build companies of scale multiplies.

However, the number of angel or seed funded companies progressing to Series A is still very low. Karthik Reddy, co-founder of Blume Ventures reinforces

Series A is still the biggest choke-point in the country.

I therefore get very worried about media articles, which suggest that startups are likely to get more capital and higher valuations. I think what the country needs is a vibrant, economically sensible startup eco-system that is mutually beneficial for  all participants – entrepreneurs, investors, accelerators, etc. If we create the imaginary fantasy land of billion dollar valuations for all startups, the funding mechanisms will falter and we will create the wrong incentives for someone to become an entrepreneur.

Accelerators, incubators and angel networks will therefore, also have to think of reconfiguring their programs to get companies better prepared for Series A. According to angel investor Vikram Upadhyaya and founder of GHV Accelerator,

Unless we are able to provide assurance of Series A capital to startups, the entire acceleration program and angel funding is a futile exercise. There is sufficient interest and capital available in the market today, and a reasonable number of high-potential startups, ready for angel and Series A investments, are likely to double from last year. But for that to happen, the enablers – accelerators and incubators – will have to reconfigure their models.

A number of senior professionals and modestly successful entrepreneurs are considering becoming angel investors. In my view, what the country needs are thousands of angel investors so that thousands of startups can get angel and seed capital for their concepts. Individual angel investors coming on to online platforms will also make it possible for startups who have smaller capital requirements – say between Rs 25 lakhs to Rs 50 lakhs – to raise capital as angel groups, whose members typically do not want to write smaller cheques, and are usually unable to support ventures unless their capital requirements are in the Rs 2 cr – Rs 5 cr range.

So for me, it is encouraging to see the increased interest from senior professionals and modestly successful entrepreneurs to also become angel investors. Media exposure of startup successes, and overall positive news about the entrepreneurship space highlighted by media, has increased awareness of startups as an investment class. Also, as the cost of doing business has reduced significantly, it allows many companies to start up with limited capital which angel investors can provide to companies that they discover and evaluate via online platforms.

To conclude, I think all this is good news for the startup ecosystem in India. From just under 300+ investment deals last year, I hope that we are able to go beyond 500 transactions this year, and as the angel investor base and enabling environment strengthens, I hope at least 2000 high-potential and competent teams are able to raise capital for their ventures. And yes, I hope that more startups are able to get ready for Series A. The industry recognizes that as a choke point. It is time now, to put efforts in place to unblock that choke point.

This article was originally published in YourStory. Please read the article here.

Image Courtesy.

Author: Prajakt Raut

Prajakt Raut is the founder of, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business.

One thought on “Changing dynamics in India’s startup eco-system”

  1. Nice, informative although I would think the array of changes might be slow to roll in but certainly the environment is so much more open and conducive…..having said that, I am prone to wonder at times how different Series A funding could be from what early phase funding or even probably mid-phase funding typically done by VCs could be.

    It’d be nice if you could throw some light on this

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